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If you are buying or selling a futures contract, your broker collects margins. Normally, your trading account has to be funded with margins before you can initiate a trade. Margins have to be paid, irrespective of whether you buy or sell a futures contract. Margins on futures trading are meant to cover the risk of adverse price movements. When you buy futures of the Nifty and if the Nifty goes down, there is a notional loss and that is your risk. Since markets are volatile, margins are essentially collected to cover this volatility risk. So, how does futures margin work? Broadly, there are two types of margins that are normally collected. At the time of taking the position you are required to pay the Initial Margin on the position (SPAN + ELM margins). Let us look at initial margins first.

The initial margin is charged to your trading account on the assumption that you are going to carry the position in your account till the expiry of the contract. These initial margins are also called carry forward margins. The initial margin has two components; SPAN margins based on a statistical concept called VAR (Value at Risk) and ELM margins based on exposure. Both margins have to be mandatorily deposited before taking a trade. The initial margin should be large enough to cover the loss of your position in 99 per cent of the cases. The thumb rule is that, greater the volatility of the stock, greater the risk and, therefore greater is the initial margin. The initial margin only looks at single-day risk.

How Initial Margins are calculated?

Let us understand the initial margin calculation with specific reference to stock futures and also index futures.

Product

Contract

SPAN Margin

ELM Margins

Total Margins

Stock Futures

RIL Mar Futures

65,675

43,655

1,09,330

Stock Futures

RIL Apr Futures

66,055

43,882

1,09,937

Index Futures

Nifty Mar Futures

58,111

34,716

92,827

Index Futures

Nifty Mar Futures

58,446

34,870

93,316

The above margins specified by the exchange are the bare minimum required for each specific F&O position. Brokers are free to collect more than this margin but they are not permitted to collect less than this margin. You will find that as the contract goes farther into the future the margins are higher due to higher risk. Also, the initial margins are much higher for volatile stocks compared to stable stocks. For example, the initial margins on Yes Bank will be substantially higher than the margins on NTPC.

What about intraday positions; are the margins lower?

The normal margin pertains to futures positions that you propose to carry forward. What if you want to square off the position intraday? Since the risk is lower, the initial margins (MIS) will be lower. For index futures the intraday margin is set at 40% of the normal initial margin while in case of stock futures the intraday margin is set at 50% of the normal initial margin. However, the trader must specifically select the order as an MIS order and also ensure that the order is close well before 3.15 pm during the trading day to avoid bulk RMS closures.

Concessional margins for cover orders

The third category which is even lower than the MIS margin is the margins for Bracket Orders (BO) and Cover Orders (CO). In a cover order the intraday trade is necessarily set with an in-built stop loss. The Bracket Order goes a step further and defines the stop loss and a profit target making it a closed bracket order. The margin in this case will be 30% of the normal margins. Like MIS orders, these BO/CO orders also have to be closed intraday.

Mark to Market (MTM) margin is an accounting adjustment. If you have bought futures of RIL at Rs.1240, you have a problem if the price goes deep below Rs.1240. Normally, when the stock price goes down in such cases, brokers will check if your margin balance is sufficient to cover the SPAN margin. (Remember Initial Margin is SPAN + ELM). That is still acceptable. However, if the stock price corrects sharply and takes the margin account below the SPAN margin level, then the broker will make a Margin Call to make up the deficit in margin. Such MTM margins are only applicable to carry forward positions and not to intraday, BO or CO positions.

Finally, what about options margining? It is a lot simpler. When you buy options, your maximum loss is limited to the premium paid. Hence, only premium margin is payable and there is no need for any further margins. However, in case of options sold, the margins are exactly like in the case of futures.